Working Paper Series: Special Edition of 2016 to 2018 Interns

Following the financial crisis of 2008/2009, financial innovation has been regarded as doing more harm than good (Bara, et al., 2016). The crisis was associated with a proliferation in innovative financial products which did not necessarily serve the best interest of consumers. Despite the negative reviews, financial innovation has been a ubiquitous character for the expansion of economies for centuries (Laeven et al, 2012), therefore, it is inevitable. Also, according to Loayza and Ranciere (2006) “ the path to financial development is far from smooth and along the way, economic growth can suffer from financial fragility that characterizes maturing systems .” In correlation, like most countries, the Eastern Caribbean Currency Union (ECCU) member states were greatly impacted by the crisis which revealed some weaknesses and precipitated the failure of several institutions within the region. Some of these weaknesses include poor credit underwriting, weak corporate governance structures and weak credit quality. Consequently, a key challenge that the ECCU faces is banking sector fragility which may have negatively impacted growth within the region. The purpose of this paper is to investigate the role of financial innovation on economic growth in the Eastern Caribbean Currency Union (ECCU), given the dearth of economic research of this nature in the region. The rest of the paper is organized as follows: Section 2 will provide some stylized facts on financial innovation and GDP per capita growth; Section 3 will provide an overview of the literature; Section 4 will review the data, the models and the tests used to assess the models; Section 5 will uncover the outcomes of the assessment of the models; and Section 6 will conclude and provide some policy recommendations.

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